02 June 2013

The Operational Risks associated with a disruption in a suppliers' "Supply Chain" is now again at the top of the Board of Directors agenda. Economic discussions inside the corporate risk management executives conference rooms have been focused on Hurricane Sandy USA, floods in China and lean supply chain strategies.

The Global Risks Report 2013 analyses 50 global risks in terms of impact, likelihood and interconnections, based on a survey of over 1000 experts from industry, government and academia. This year’s findings show that the world is more at risk as persistent economic weakness saps our ability to tackle environmental challenges. The report highlights wealth gaps (severe income disparity) followed by unsustainable government debt (chronic fiscal imbalances) as the top two most prevalent global risks. Following a year scarred by extreme weather, from Hurricane Sandy to flooding in China, respondents rated rising greenhouse gas emissions as the third most likely global risk overall. The findings of the survey fed into an analysis of three major risk cases: Testing Economic and Environmental Resilience, Digital Wildfires in a Hyperconnected World and The Dangers of Hubris on Human Health. In a special report on national resilience, the groundwork is laid for a new country resilience rating, which would allow leaders to benchmark their progress. The report also highlights “X Factors” – emerging concerns which warrant more research, including the rogue deployment of geoengineering and brain-altering technologies.

The art of Risk Assessment and Vulnerability Management extends beyond the guards, gates and fire walls defending your global institutions. The risk of suppliers' "Supply Chain" disruption has grown significantly in the past year as a result of just-in-time (JIT) inventory management. This is further inflamed by the outsourcing momentum as some economies continue their struggle with high unemployment or natural disasters.

Automotive and semiconductor chip companies are feeling the impact of components out of stock and the race to find alternative suppliers to keep production lines at full capacity. The implications and outcomes of a lack of effective supply chain resilience planning can provide exposure beyond just a lost of sales. This myopic approach to effective Operational Risk Management strategy can extend to market share erosion and a tarnished brand image. These quickly translate into the potential loss of shareholder value. One must remember Fukushima. Marc Levinson explains:

It is hard to quantify how much supply-chain interruptions have cost business in recent years, because they generally go undisclosed. After all, no company wants to alert its competitors to weaknesses in its business model. And even in the case of the Japanese disaster, many companies with lower profiles than the automakers have yet to announce how they will be affected by shortages of or higher prices for essential components. Public attention has focused on outages at Japanese plants that turn out silicon wafers and memory chips, but there are surely many more obscure products that are in short supply. The total cost of lost U.S. production due to shortfalls of Japanese components will easily run into the billions of dollars; slowing or closing down auto assembly lines, as several manufacturers have already done, does not come cheap. Other products that are “made in America,” particularly factory equipment, also rely heavily on Japanese electronics, and even if those producers are not forced to close plants temporarily, the risk of delays in filling orders may cause impatient customers to defect to competitors who do not depend on inputs from Japan.

The risk assessment of suppliers' "Supply Chains" will not be overlooked any longer from the Board Room. More prudent audits of current supply chain exposures will take place and the corporate operations management will feel the pain for some time to come. The independent and thorough review of the exposures to the institution are going to make some in procurement and accounting uncomfortable. The risk mitigation strategy going forward will invoke a third party review of most supply chain strategy planning to encompass the use of "Black Swan" scenarios and alternative thinking on the risk of volatility.

Even in October 2010, a survey of resilience professionals conducted by The Business Continuity Institute found that almost three quarters of supply chains had experienced significant disruption in the 12 months prior to the study. With 28 per cent of those occurrences attributed to supplier insolvency and 20 per cent due to failure of outsource service provision, almost half of these supply chain disruptions were down to supplier or service provider failure - in other words, circumstances outside one’s own immediate control.

So how resilient is your supplier's "Supply Chain"? The security and safety of your private sector organizations supply chain is now back on the Board of Directors agenda, so what are you doing about it? Now think about this. What if the security and safety of your country depended upon a specialized semiconductor for an electronic component that was destined for Boeing, Raytheon or Cisco?

The risk of your supplier's "Supply Chain" may have consequences far beyond the bottom line at the next shareholders meeting. It could mean the difference between having a resilient economy or a devastating asymmetric attack on the homeland.

About

Operational Risk is defined as the risk of loss resulting from inadequate or failed processes, people, and systems or from external events. The definition includes legal risk, which is the risk of loss resulting from failure to comply with laws as well as prudent ethical standards and contractual obligations. It also includes exposure to litigation from all aspects of an institutions activities.

"The Only Thing Necessary For Evil To Triumph Is For Good Men To Do Nothing." --E. Burke